Chapter 13 bankruptcy requires filers to repay a portion of the debt they owe. There are a few reasons why someone would file Chapter 13 instead of Chapter 7. The first is that their income is too high to file Chapter 7. In order to file Chapter 7, your income must be below the median income for your household size. The United States Census Bureau issues median income figures twice a year.
Someone might also file Chapter 13 if they have assets that are not protected by the bankruptcy code’s exemption rules, or they have assets that are significantly more valuable than the exempt amount. Lately, we have been filing Chapter 13 bankruptcies for homeowners whose home value greatly exceeds what they owe on the home. Finally, someone might file Chapter 13 if they have gone through a divorce and were ordered to repay a portion of their ex-spouse’s debts.
Before we calculate what someone’s monthly Chapter 13 plan payment will be, we have to determine how long their plan will be. A Chapter 13 plan will last between three and five years. If a filer’s income is below the median income for their household size, their plan can be for three years (36 months). If a filer’s income is above the median income, their plan must be for five years (60 months). A plan can last no longer than five years.
How much a filer’s monthly payment will be depends on three things: their disposable income; their non-exempt assets; and whether any of their debts are considered “priority” or must be paid off during the course of their plan.
Disposable income is calculated based on a formula set forth in the bankruptcy code. It’s fairly straight forward, though. Disposable income equals gross household income minus reasonable and necessary expenses. So, if your gross household income is $1,000 and your reasonable and necessary expenses total $900, your disposable income is $100. You will have to pay $100 a month to your unsecured creditors over the course of your Chapter 13 bankruptcy.
The second factor we have to look at to determine someone’s Chapter 13 plan payment is whether or not they have any non-exempt assets or assets that are greater in value than what is protected under the bankruptcy code’s exemption rules. Let’s say someone has $100,000 in equity in their primary residence. The homestead exemption in Colorado currently only protects $75,000 in equity. That means that the filer’s unsecured creditors will have to get at least $25,000 over the course of their Chapter 13 bankruptcy. That $25,000 will be divided up into equal monthly payments. The filer will also have to pay attorney fees on top of that $25,000.
Certain debts, known as priority debts, must be paid off during the course of the Chapter 13 plan. Back taxes and child support arrears are considered priority debts. If someone has $10,000 in back taxes, that is the minimum amount that will have to be paid in a Chapter 13 plan. If someone is behind on their mortgage, the arrears amount will also have to be paid during the course of the plan, on top of their regular mortgage payment.
A filer will have to pay the greater of either their disposable income, value of their non-exempt assets, or the amount of their priority debts.
Imagine if someone’s disposable income was $100 and they are in a three year plan, but they also have $18,000 in non-exempt equity in their home. Their monthly Chapter 13 payment would have to be $500. If their disposable income isn’t sufficient to make that monthly payment, then Chapter 13 isn’t feasible. That person might consider selling their home and using a portion of the proceeds to pay off their debts or live off their proceeds and then file Chapter 7.
Chapter 13 bankruptcy is a complex process. My consultations with people who need to file Chapter 13 usually take between an hour and 90 minutes to go over the details and provide all the scenarios they’ll want to think about. If you have questions, please call us at 303.331.3403.